Opinion Selling it short

Before getting into the minutiae of what ails the programme itself, let’s quickly look at how the Mumbai investor made his pot of gold. The bureaucracy that accompanies a market offer lends itself to a terrible time lag. The time gap between the day the government announces a stake sale plan in a PSU and the actual launch of an offer can be as large as one year. Market professionals thrive on advance information. This allows them to beat down the price by short-selling shares — that is, selling shares of a company without really owning them. Short-sellers believe that prices will drop in future, hence they sell at a high price today and cover it by purchasing the same number of shares at a lower price on a later date. This particular investor made huge profits during the stake sales of ONGC, NTPC and PGC.

This is just one fundamental mistake that the government continues to repeat. The 5 per cent Sail disinvestment in December 2014 was actually cleared by the UPA government. The 52-week high of Sail stock was Rs 110, but then short-selling brought the price down over time, leading to a floor price of Rs 83.5 on the day of the offer. It is the same with NTPC and PGC, the issues where the Mumbai investor made mega-bucks. Indeed, an announcement much ahead of the actual sale and the consequent fall in prices results in a notional loss to the government. This is now being rectified by the government — cabinet clearance is taken for stake sales in a bunch of companies. This will prevent the distribution of asymmetric information to market players, hindering them from exploiting an opportunity to pick on a particular stock.

There are many more examples of the department of disinvestment’s limited grasp of market expectations. For instance, in the recent past, the management of a state-owned bank decided to offer shares to the public at a price lower than its book value. Some large stakeholders alerted the bank management and even the finance ministry to the fact that this amounted to penalising existing shareholders. But the advice fell on deaf ears.

The second issue is more serious, and one all investors hate. It is a combination of three aspects — a not-so-professional board, ministry interference and, to top it all, policy uncertainty — which, besides damaging investor perception, also adversely impact companies’ future earnings and growth potential. Here, order can be restored only by the government. For instance, more than a dozen PSUs are without a full-time head, many do not have high-quality independent directors and still others are least bothered about the successful outcome of a public offer since they hold little stake. A good employee stock option plan will infuse a sense of ownership among the top brass. Government managers and PSUs may also need some basic lessons in soft skills.

The chief of a global investment bank was appalled when the joint secretary of an administrative ministry handed him the luggage at an airport after he had raised his hands in greeting. The banker was furious, and one can imagine his commitment to seal the deal. For most bureaucrats and PSU managements, disinvestment is just another transaction. It is not about creating and influencing market expectations. Since there is no continuity in the disinvestment department, it is difficult to build expertise of the kind required to overcome the challenge in understanding markets. The market has been waiting for clarity on the subsidy sharing formula among oil PSUs for years. During the ONGC stake sale three years ago, a fund manager asked about this during a pre-public offer meet. But the ONGC brass told him that it didn’t have answers, and that it was the government’s prerogative. Government representatives refused to commit to an answer. Now, if an ONGC issue is planned again, how will the government build an investment case? The subsidy sharing mechanism is still not in place.

Finally, there is the government’s aversion to innovation. For instance, it has never really reposed faith in the Indian public. A public offer, hypothetically, of the State Bank of India, can ideally be restricted to retail investors only. If institutions or high net worth individuals know they cannot participate, there would be little incentive for them to beat down the price. There is a myth that retail investors do not have the depth to subscribe to large issues. But in the last six months or so, equity mutual funds have received an average of Rs 5,000 crore every month. A quality stock like the SBI, when offered at a 5-10 per cent discount to retail investors, will be lapped up. Why not experiment?

pv.iyer@expressindia.com